Who Is Wyoming's Stablecoin For?
CFPB, McWilliams Advance Fintech Bailout, CFPB Releases Open Banking ANPR, Crypto Groups Push Back on Banks' GENIUS Opposition
Hey all, Jason here.
I’m knee-deep in conference and travel prep, with my flight to New York less than two weeks away.
If you’re in New York for Finovate and there are any can’t-miss industry happy hours or dinners I should be attending, feel free to drop me a line. Meeting up with folks at a coffee shop, bar, or restaurant that’s not in the Venetian is always a nice change of pace!
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Who Is Wyoming's Stablecoin For?
Last week, Wyoming officially launched its own stablecoin: the Frontier Stable Token, or FRNT.
The choice to refer to it as a “token” rather than a “coin” may have something to do with Article 1 Section 10 of the U.S. Constitution, which, among other things, specifies that no state shall “coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.”
Some have argued that Wyoming’s FRNT could constitute a “bill of credit,” though the 1837 Supreme Court Case Briscoe v. Bank of Commonwealth of Kentucky specified that a bill of credit “is a paper issued by the sovereign power containing a pledge of its faith and designed to circulate as money.”
Wyoming’s FRNT isn’t backed by a pledge of the state, but rather is evidence of money held in trust. Per the Wyoming Stable Token Act, “A Wyoming stable token is a virtual currency representative of and redeemable for one (1) United States dollar held in trust by the state of Wyoming.”
The reserves backing FRNT will be held in cash, U.S. Treasury securities with a duration of one year or less, treasury security repurchase agreements with a term of thirty days or less.
Earnings from reserve assets will be retained such that the value of reserve assets is equal to 102% of the aggregated face value of issued FRNT; excess earnings will be transferred to cover the cost of operating and administering the token.
FRNT has been deployed on seven blockchains: Arbitrum, Avalanche, Base, Ethereum, Optimism, Polygon, and Solana.
While the federal government recently enacted legislation to regulate stablecoin issuers, the GENIUS Act, it appears that that law wouldn’t apply to state governments like Wyoming, due to a quirk of the legal definition of a “person.”
18 U.S.C. § 2510(6) defines a “person” to include “any individual person as well as natural and legal entities,” but excludes governmental units, such as federal, state, and local governments.
The GENIUS Act defines “person” to mean “an individual, partnership, company, corporation, association, trust, estate, cooperative organization, or other business entity, incorporated or unincorporated.” The definition does not include federal, state, or local governments.
While Wyoming hasn’t given any indication it doesn’t plan to comply with the requirements of the GENIUS Act, this apparent loophole poses some interesting possibilities, including governmental stablecoin issuers paying interest while non-governmental issuers are prohibited from doing so.
Perhaps more interestingly, if Wyoming does comply with the GENIUS Act, it would need to be licensed as a permitted payment stablecoin issuer (PPSI). GENIUS offers both federal and state paths to becoming licensed.
Assuming FRNT is below the $10 billion threshold, Wyoming could opt to be state licensed — meaning that Wyoming’s own financial regulator could be responsible for licensing and overseeing Wyoming’s stablecoin.
A more pressing question may be, who is this for? Why would anyone want to trade a regular US dollar for a Wyoming-issued Frontier Stable Token?
The state’s website lays out six reasons:
FRNT can be sent to anyone with an internet connection, anywhere in the world
FRNT transactions usually cost only a few cents, or fractions of a penny
FRNT is available for user 24 hours a day, 7 days a week, 365 days a year
FRNT transactions can settle in just a few seconds
FRNT can be sent directly from sender to recipient, without intermediaries
FRNT transactions are immutable and provide instant audibility
But thinking through each of these suggests there is little if any differentiation from solutions already available:
Presumably FRNT can’t literally be sent to “anyone with an internet connection, anywhere in the world” — eg, sanctioned wallet addresses, persons, or jurisdictions, such as entities in North Korea, Iran, Cuba, and so forth. Even setting that issue aside, FRNT doesn’t provide a capability that isn’t already available from any of the dozens of USD-pegged stablecoins that already exist.
FRNT may have low transaction costs, but, for domestic use cases, consumers and businesses have payment mechanisms available that have zero cost to users, whether that’s ACH or apps like Venmo and Cash App. Yes, these aren’t truly instant and do involve intermediaries. But while speed of transaction may matter for some, in many use cases, users aren’t terribly concerned if the payment happens instantly or not. If they are, domestic faster payment rails like Same Day ACH, FedNow, and TCH RTP are battle-tested, have the benefit of recourse if something goes awry, and are relatively inexpensive.
Similarly, FRNT’s 24/7/365 availability and instantaneous settlement may be advantageous for certain use cases, but this isn’t a differentiator vs. other existing, widely available stablecoins, like Circle’s USDC.
And transactions being “immutable” and being processed without an intermediary are not an unalloyed positive: when something goes wrong or when a dispute arises, it is that intermediary and rules governing the payment rail, like card network rules or Nacha policies, that allow for disputes to be fairly adjudicated.
In short, there is no clear competitive differentiation vs. options that are already available in the market, including the many USD-pegged stablecoins that already exist and operate on the same blockchains FRNT uses.
While an unlikely outcome, taking Wyoming’s approach to its maximal conclusion would see 50 states plus the US Virgin Islands, Guam, Puerto Rico, American Samoa, and the Northern Mariana Islands all issuing their own stablecoins. Taking this even further, there’s nothing to stop counties, cities, and other government units from issuing their own stablecoins. In aggregate, there are more than 38,000 state, county, township, and municipal governing entities in the United States.
Each state issuing its own stablecoin would seem unlikely to provide any real utility, while increasing the complexity and, by extension, risk in the financial system.
Such an outcome would be akin to state commemorative quarters: a novelty that ultimately serves no real purpose.
The biggest risk may come when a given stablecoin — whether privately issued or state issued — doesn’t reach significant circulation such that the issuer generates enough revenue from reserves to cover their operational costs.
This seems to be a near inevitability, with more than 50 USD-pegged stablecoins already in existence, with all but six having a circulation of less than $1 billion. And if interest rates drop, which Trump has been aggressively pushing the Fed to do, the revenue issuers generate will decline as well.
GENIUS does contain provisions to address the bankruptcy of a licensed stablecoin issuer, though some in industry have argued the measures are inadequate. And even if the bankruptcy process outlined in GENIUS is sufficient on paper, how a stablecoin issuer becoming insolvent would play out in real life could end up looking quite different.
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It wouldn't be possible to do what I do without the support of loyal readers like you.CFPB, McWilliams Advance Fintech Bailout Plan In Synapse-Evolve Disaster
The Consumer Financial Protection Bureau filed an adversary complaint against Synapse last week, in a move to enable the Bureau to use its civil penalty funds to bailout victims of the Synapse-Evolve disaster, Fintech Business Weekly was the first to report.
The CFPB’s complaint says that as early as September 2023 “both Evolve and Synapse were aware that there was a deficit of tens of millions of dollars in funds that Evolve was holding for End Users, which included consumer funds.”
Fintech Business Weekly reported in October 2023 — more than seven months before Synapse collapsed and users lost access to their funds — that there was a deficit of at least $13 million in FBO accounts at Evolve.
Now, the CFPB’s complaint alleges Synapse violated the Consumer Financial Protection Act’s prohibition on unfair, deceptive and abusive acts and practices (UDAAP) by “failing to maintain adequate records of the location of consumers’ funds and failing to ensure those records matched the records maintained by Partner Banks.”
The complaint largely rehashes already known details about Synapse’s failure, discrepancies between Synapse’s records and the aggregate amount of funds held at its partner banks, and the impact on end users — though it is notable as the first instance of a government agency formally becoming involved in the case.
Still, a careful reading of the complaint and related filings offers some hints of how the CFPB is thinking about the situation and what may come next.
Of the four banks Synapse worked with, the complaint singles out Evolve Bank & Trust to specify it is a “covered person” under the CFPA:
At least one of the Partner Banks, Evolve Bank & Trust (Evolve), offered and provided consumers with financial services, including accepting and maintaining deposits accounts, transmitting consumers’ funds to financial institutions, offering consumers debit cards and services, direct deposit, bill payment, and wire transfers.
Evolve is a “covered person” as that term is defined by 12 U.S.C. § 5481(6)(A), because it offered or provided a “consumer financial product or service” under the CFPA, by “engaging in deposit-taking activities, transmitting or exchanging funds, or otherwise acting as a custodian of funds or any financial instrument for use by or on behalf of a consumer.” 12 U.S.C. § 5481(5)(A), (15)(A)(iv).
The complaint goes on to assert that Synapse provided a material service to the Evolve in connection with the bank’s provision of a consumer financial product or service, meaning that Synapse meets the definition of a “service provider” under the CFPA.
This is noteworthy because, although the CFPB’s complaint is only against Synapse, the Bureau is clarifying that Synapse was a third-party service provider to Evolve. Logically, if Synapse engaged in unfair practices, it isn’t a leap to make the argument that the bank to which Synapse was providing services, Evolve, also engaged in unfair practices.
But it would be up to Evolve’s primary federal regulator, the St. Louis Federal Reserve, to take an enforcement action against the bank on the matter.
The St. Louis Fed isn’t the only potential legal exposure Evolve has here, however. The CFPA empowers state attorneys general to enforce the law, meaning state AGs could potentially pursue action against the bank for unfair practices.
And, many states also have “mini-FTC” laws and/or consumer protection laws that prohibit unfair practices that could give end users a private right of action to sue Evolve for its apparent unfair practices — this would be a distinct cause of action apart from the existing class action suits against the embattled bank.
The CFPB’s complaint seeks to enjoin Synapse from further violations of the CFPA (irrelevant, as Synapse isn’t an operating entity), additional injunctive relief (also irrelevant), and a civil money penalty.
The civil money penalty is key, as that is a prerequisite for the CFPB to tap its civil penalty fund to potentially make end users whole.
Hearing Scheduled Sept 11th For Court To Approve Settlement
Concurrent with the CFPB’s filing of the complaint, the Bureau also filed the stipulated final judgment and order it reached with the Synapse Chapter 11 Trustee, former FDIC Chair Jelena McWilliams.
The order defines the harm to consumers as the difference between the consumer’s account balance and the sum of all distributions the consumer receive from partner banks plus interest at a rate equal to the weekly average 1-year constant maturity Treasury yield for the week preceding the judgment for the period of time consumers did not have access to their funds (that’s an overly legalistic way of saying the calculation of the harm end users experienced will include interest on the amount of funds for the period of time the given amount of funds were unavailable to them.)
The order also prohibits the sale of customer information Synapse holds and assesses a $1 civil money penalty against the company.
McWilliams filed a motion asking the court to approve the settlement and requested that the hearing on that motion take place sooner than would normally be the case.
In McWilliams’ declaration supporting the request to schedule the hearing on shortened notice, McWilliams explains that the process for the CFPB to access its civil penalty fund requires the a “final” court order. The order does not become “final” until the time for filing an appeal has expired and no appeals are pending.
This matters because the CFPB makes allocations from its civil penalty fund in six-month windows. The current window ends September 30th, meaning that, if the order isn’t “final” by then, end users would likely have to wait another six month for funds to be allocated — if the CPFB has adequate funds still remaining by then.
Thus, McWilliams asks the court to enter the stipulated judgment and order no later than September 16th.
A hearing on McWilliams’ motion for the court to approve the settlement, which presumably is primarily a formality, is scheduled for September 11th at 10:00am PT.
The court approving the settlement of the CFPB’s complaint against Synapse is merely the first step in what could be a lengthy process for the Bureau to allocate money from the civil penalty fund, determine a distribution methodology, and actually begin making payments to victims.
“Boy Scout” Bank Seeks to Silence Victims With Hardball Legal Tactics, Aggressive NDAs
Despite new Evolve CEO Robert Hartheimer describing the bank as acting like a “Boy Scout,” Evolve is using hardball legal tactics against a victim seeking answers about the failure of Synapse.
Justin Newbern, a user of fintech and crypto app Juno, has been seeking answers for sometime about what happened to the money he held through the Juno app — and, presumably, still hopes to get it back.
As part of his efforts, he filed and was granted a request for a “2004 examination” of Evolve Bank & Trust as part of the Synapse bankruptcy case, according to documents filed in the case.
A 2004 examination allows a party in interest to conduct an examination of entities involved in the bankruptcy case regarding the acts, conduct, property, liabilities, financial condition, or any matter that may affect the administration of the bankruptcy estate.
But rather than cooperate, Evolve has pushed back on Newbern's request at seemingly every opportunity. Evolve opposed his request for the exam (which it lost, the judge originally granted the exam on June 24th).
Evolve appears not to have cooperated with the exam, as Newbern served Evolve with a subpoena related to the matter on July 9th and asked the court to compel compliance with the subpoena on July 15th.
But Evolve filed a motion opposing Newbern's motion to compel, and, on August 8th, the bank filed a motion to quash Newbern’s subpoena and/or for a protective order.
Newbern's opposition to Evolve's motion to quash included a couple interesting exhibits, including a non-disclosure agreement that Newbern says Evolve asked him to sign as a prerequisite for entering into discovery as part of private mediation process as an alternative to the 2004 exam process.
Regardless of the outcome of the mediation, which Newbern seems to have declined in favor pursuing the 2004 examination, the NDA would prohibit Newbern from discussing “confidential information,” including any documents shared via the mediation process, any potential discussion of or actual settlement, and even the NDA itself, in perpetuity.
The agreement would also prohibit Newbern from “disparaging” the bank by making any comment “derogatory or detrimental to the good name or business reputation of Evolve” for a period of 10 years — regardless of whether or not such statements are factually accurate.
The agreement even threatens Newbern with $10,000 in liquidated damages plus fees and costs, should he violate the non-disparagement clause.
Newbern’s opposition to the motion to quash also included a declaration from a former Synapse employee who worked at the company from 2016 until the company’s collapse in May 2024.
In that declaration, the employee says they are “willing and able to provide consulting assistance to Justin Newbern in connection with the examination,” including by “identifying categories of Synapse records most likely to contain information relevant to the examination topics and advising on the technical feasibility and process for Evolve to retrieve such records from Synapse systems.”
Ultimately, Newbern’s efforts to compel Evolve to comply with the 2004 examination were unsuccessful, with the judge in the bankruptcy case, Martin Barash, granting Evolve’s motion to quash after a hearing last Thursday.
Everything Else: CFPB Releases 1033 ANPR, Crypto Trades Push Back on Banks’ GENIUS Regrets
True to what it told the court in a legal challenge to its existing open banking rule, the Consumer Financial Protection Bureau released an advanced notice of proposed rulemaking for a “do over” of the open banking rule.